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Direct trading in the Chinese and New Zealand currencies starts today after a joint announcement in Beijing by Premier Li Keqiang and Prime Minister John Key as he began an official visit.
The long-awaited move means the kiwi joins the Australian and US dollars and the Japanese yen as the four market-making currencies that can be converted directly into renminbi (RMB) or yuan.
The People’s Bank of China (PBOC) says a reference rate for the currencies will be announced daily at 9:15am in Shanghai, with yuan moves limited to 3% on either side of the fixing.
The UK and Singapore announced deals with China in October to start direct trading between their currencies and the yuan, which has overtaken the euro to become the second-most widely used currency in global trade finance. South Korea is also seeking convertibility as the Chinese currency.
Mr Key says direct convertibility will make doing business with China easier and will stimulate trade and investment.
“Direct trading will also increase the integration between the New Zealand and Chinese financial systems, and deepen the economic relationship between the two countries," he says. "China is now New Zealand’s top destination for exports of goods.”
Bankers say the main advantage for businesses and travellers will be a drop in transaction costs because it will mean only one currency pair rather than two. Two-way trade between New Zealand and China is now worth more than $18 billion.
Approval has been granted to ANZ, HSBC and Westpac to act as market makers for the currency pair.
On Monday, China doubled the yuan’s trading band against the US dollar to 2% on either side of a daily reference rate set by the central bank, a step toward giving market forces a greater role in determining its exchange rate.
The PBOC also keeps its currency within 3% of fixings against the euro, the UK pound, the yen and the Hong Kong dollar, while a 5% limit applies to the Malaysian ringgit and the Russian ruble.
“Direct convertibility marks another milestone in the internationalisation of the renminbi,” HSBC says. “Coupled with China’s recent move to widen the daily trading band of the renminbi, it further demonstrates the country’s determination to speed up its financial market reform.”
HSBC says it has renminbi trade capabilities in more than 50 markets globally. It also says around 12% of China’s total foreign trade is settled in RMB and the bank expects this to rise to around 30% by 2015.
ANZ says it has had a continuous presence in China since 1986 and today ANZ China has branches in Beijing, Shanghai, Guangzhou, Chongqing and Hangzhou.
ANZ recently received preparatory approval on a Chengdu branch, where it already has an operations hub, and to establish a sub-branch in the China (Shanghai) Pilot Free Trade Zone (Shanghai FTZ). ANZ also has strategic partnerships with Shanghai Rural Commercial Bank and Bank of Tianjin.
Westpac says it has been present in China for more than 40 years and has foreign exchange dealers located in Shanghai. Its Asian branch network includes Beijing, Shanghai, Hong Kong, Singapore and Mumbai and a representative office in Jakarta.